The Federal Reserve is the bank of the United States – they regulate monetary policy, and they provide stability within the central banking system. And while an increase in short-term rates might seem to be a bad thing, it’s actually an indication that the Fed sees the US economy in positive terms, and is bringing interest rates up to better mirror inflation. While it’s true that mortgage rates will now rise – local lender Robert Mitchell of Movement Mortgage is already reporting that they’ve seen rates rise to 4.25% – the truth is that this is really a sign of an improving economy. With quoted rates effective today of 4.25% on a 30-year fixed loan, let’s run some numbers to see what the difference in today’s advertised mortgage rates look like:

For home buyers, today’s news is going to mean a slight increase in the overall cost of a loan. Again, based on the calculations above, that cost is going to be minimal, but each hike in the Fed’s rate will mean a slight increase in the monthly cost of a home loan. And for sellers, it puts a small amount of downward pressure on you, as well – rising rates are going to keep a small number of buyers out of the market initially, but we’re predicting that’ll reset a bit as we head into the spring market. And remember – rates are still incredibly low, historically. The chart below, from HSH.com, shows 30-year conventional rates over the last 16 years.

The answer? A lot. But not as much as you might think, and it’s somewhat dependent upon (1) the lender you’re using, (2) the type of loan you’re getting, and (3) some unknown force of the universe.

Getting a mortgage isn’t terribly hard, it’s just tedious. So when you’re preparing to make a loan application with a lender, it’d be a good idea to have all documentation related to your income, your expenses, and your assets, at hand – ’cause they’ll want to see everything. Have:

at least two years of your tax returns (three or more if you’re self-employed), including all W-2s and 1099s. Two month’s worth of pay stubs, as well.

bank statements. The rule of thumb used to be three months worth of bank statements, but I like being prepared – have six months.

That’s it. But be prepared to explain everything – if you have lots of overtime pay, be prepared to explain why, and how much. If you’re getting large deposits (from the sale of items, like cars, etc.), be prepared to explain where those came from. And if you’re getting money for a down payment, be sure to talk with your lender before receiving the gift, so that you know you’re receiving and handling the gift appropriately.

There are plenty of hoops to jump through when getting a mortgage, but being prepared will go a long way. Talk to your lender about what’s going to be needed, as well as what needs to be done before getting the loan so that you’re in the best position possible for the type of loan you want. Loan contingencies are one of the most common areas we see a deal fall apart … the buyers who take the time to get prepared up front typically have no issues at all.

A Federal Housing Administration (FHA) loan is a loan that’s insured against default, meaning the FHA guarantees the loan will not be a loss for the lender should the borrower not pay … which is why there’s a fee for mortgage insurance. The FHA charges this upfront fee – currently set at 1% of the loan amount – in addition to a monthly insurance premium, called MIP. Lenders like these FHA loans because of the guarantee, and borrowers – home buyers – like them because of the low downpayment requirement of as little as 3.5%.

It all changes April 1 2012, though. From the post:

Upfront MIP for loans raises from 1.000% to 1.750% of the loan size. Annual MIP fees change, too, climbing by 10 basis across the board, and by an additional 25 basis points for loans between $625,500 and $729,750.

Using the example of a recent transaction, the borrower purchased a $217000 house, and paid a fee of $2100 at closing for the upfront MIP. Starting April 1 2012, that same borrower would pay a fee of $3797 for the upfront MIP on the same house. A difference of $1697 just because they closed before April 1. That’s comparable to saving enough to pay a year’s worth of electric bills.

When you’re shopping for a mortgage, the two most common fixed-rate mortgage terms you’ll come across are thirty years, and fifteen years. There are other options, sure, but those are the most common.

Fifteen years is a long time. So is thirty years.

Looking at today’s interest rates on both 30-year and 15-year loans, the 30-year rate right now (remember they change a lot) is 3.94%, while the 15-year rate is 3.24%. While the rate on the 30-year term is higher than the 15-year, the monthly payment is actually lower, because the term of the loan is longer. Confused yet? Let’s take a look at how it works out.

According to the New River Valley MLS, the average price of a home sold in Blacksburg VA in 2011 was $251657 – we’ll round down to $250000. (See what $250000 in Blacksburg gets you here). Now see that calculator to the right of this post, the one that says “Estimate Your Payment”? Let’s enter in a few variables to see what a 30-year loan vs. a 15-year loan looks like

In Principal enter $250000

In Interest enter 3.94% (for a 30-year loan)

For Term choose 30 years

In Down enter $50000 (meaning we’re taking on a $200000 loan)

In Taxes enter $2000

In Insurance enter $1000

Hit Calculate

For a 30-year loan, the monthly payment (with the variables above) works out to $1197.92 a month (Disclosure – I’m not a lender. For a real lender, go here). And if you go a little further down and click on Amortization Schedule, you can see exactly how much of your monthly payment goes to pay interest, and how much of it goes to pay principal, each month. If you held the loan for the full 30 years? You’d pay a whopping $141253.83 in interest alone.

Using the same criteria as above on a 15-year loan raises your monthly payment to $1559.24 a month, an increase of almost 25% – that’s significant. But here’s where the value of a 15-year loan comes in. Click on Amortization Schedule again, and scroll to the bottom of the Interest column … $35662.97 is the total amount of the interest you’d pay by holding the loan for a full fifteen years, a savings of more than one hundred thousand dollars over a 30-year loan ($105590.86, to be exact).

Don’t like numbers, and need a visual? Here you go (courtesy of Quicken Loans) …

30-year Amortization Chart

15-year Amortization Chart

As you can see, it will take 12 years on the 30-year loan to get to a point where you’re paying more in principal than you are in interest, whereas on the 15-year loan you’ll start paying more in principal than in interest right away. Of course, the likelihood of someone holding a mortgage for thirty years – or even fifteen years, is slim. But look at the savings over just five years (thanks to GoodMortgage.com for the calculator):

If you have a 15-year mortgage you’ll have almost $37000 more in equity than if you had a 30-year mortgage, using the same variables as above.

See why, if you can build the payment into your monthly budget, a 15-year mortgage just makes sense?

First, the good news – each USDA mortgage has an upfront fee that’s used as a mortgage guarantee fee. That premium, which has been set at 3.5%, is going down to 2%.

Now, the bad news – prior to October 1st, USDA mortgages don’t have monthly mortgage insurance, but after October 1st that’s going to change. The new basis will be .30 points, which on a $200000 loan might be an extra $35 per month or so.

Does $35 a month change your life? Not likely, and if it does you might not be ready to buy a house. What it CAN do, however, is put you at risk of not qualifying for a USDA loan if your debt to income ratio is right on the edge. If you’re currently working on getting a USDA 100% mortgage, be sure to talk to your lender to see where you stand.

Dan Green at The Mortgage Reports wrote a post this morning that talks about the new USDA guidelines for 100% mortgage loans, and I want to repost it here, because (a) I have two USDA loans going with Dan right now and his team is fantastic, and also because (b) he references Blacksburg VA and that’s kind of cool. Oh, and (c) because 100% loans are still available in some areas of the New River Valley.

USDA loans, or Section 502 loans, are designed to provide borrowers 100% financing when they purchase real estate in USDA-eligible areas, and you can find out whether your home loan is USDA-eligible here. In the New River Valley, Blacksburg is the only community that is not USDA-eligible, while areas like Radford and Christiansburg are.

From Dan’s post:

USDA loans cannot be used to purchase a vacation home. They are good for primary residences only.

Both first-time buyers, and repeat buyers, are eligible for USDA 100% financing.

When you buy a home, you should search by cost, not price. After all, cost is what you pay monthly. It’s your mortgage, your taxes, your insurance, and assessments. It’s your costs of homeownership and maintenance.

Start with the budget, and arrive at the price … not the other way around. Also don’t forget to add other costs to your budget, for example janitorial service oaklandjanitorial.com.

Mortgage Rates Are “Good” For Less Than 4 Hours

In February, lenders issued 2.45 rate sheets per day. This means that mortgage rates changed every 3 hours, 16 minutes on average last month.

It also means that the rate quote you picked up by email yesterday isn’t worth the pixels it’s printed on today. More than 3 hours have passed and your quote has since expired; it’s a relic of some other day’s mortgage market conditions.

In a market that moves this fast, you not only lose the ability to “sleep on it” with respect to mortgage rate quotes, you also lose the ability to “think on it”.

The Internet has created an informational surplus, but some things aren’t well-suited for exhaustive research – like loans. That’s why working with an expert lender first, before you even start the home shopping process, to determine your loan parameters will help the process go much more smoothly. A quoted rate is nice, but if you can’t pull the trigger because your ducks aren’t in a row, then you’re gonna miss your shot.

The data relating to real estate on this website comes in part from the Broker Reciprocity/IDX (Internet Data Exchange) Program of the New River Valley Multiple Listing Service, Inc. Real estate listings held by brokerage firms other than Nest Realty are marked with the Broker Reciprocity logo (IDX) and detailed information about them includes the name of the broker.